Paul Krugman on California Fiscal Crisis, Pensions, and ‘Not a Shred of Evidence’ That Higher Taxes Kill Jobs

On Monday on KQED Public Radio’s Forum program, New York Times op-ed columnist and Nobel Prize winner in economics Paul Krugman sat down with host Michael Krasny to discuss the perpetually lousy economy and possible solutions, as described in Krugman’s new book, End This Depression Now! (You can read a little of that on Amazon.com.)

In the course of the conversation, Krugman addressed California’s fiscal crisis as well as another issue that’s been much on local minds of late: public pensions. Liberals, read on with fawning admiration; conservatives… prepare for the gnashing of your teeth…

Edited transcript:

QUESTION FROM LISTENER: Can California solve its problems separate from U.S. stimulus?

PAUL KRUGMAN: No. You can do some things. [But] I think there’s a lot of reason to believe states are better advised to meet their fiscal crisis at least partly by raising taxes, not just by cutting spending. Which of course is very hard given the constitutional mess California is in… In a lot of ways California led the nation into its current state of disaster.

[But] there’s a limited amount you can do. It’s pretty much the same thing for the prime minister of a small European country. How much can he do? There at least they have the nuclear option of leaving the Euro. But that’s a huge step to take. And of course California doesn’t have anything like that. So I’m willing to cut governors a lot of slack, because there’s only so much they can do.

HOST MICHAEL KRASNY: Jerry Brown’s become kind of an austerion in some ways…

PAUL KRUGMAN: He sort of has to. I have to say, I’m feeling really old, that Jerry Brown’s governor of California again and he’s an austerity advocate. What happened to my generation?

QUESTION FROM LISTENER Will the government borrowing to stimulate demand cause a long-term improvement in the economy when the economy’s underlying institutions seem to be dysfunctional? That seems to be trying to prime a pump with terribly leaky seals.

For instance, outside my window, the city of Mountain view is replacing a water main with labor artificially priced far above its global value, perhaps a hundred dollars per hour. If we could re-price domestic labor more flexibly, Mountain View could hire many more people, each at lower pay, and fix many more water mains or hire more teachers.

PAUL KRUGMAN: First of all, I want to ban pump priming as a metaphor, because nobody in modern America knows what it means. Call it jumpstarting instead.

But bear in mind, mostly what we’re talking about now is rehiring school teachers. The representative public employee is a school teacher. And are school teachers, or public employees in general, vastly overpaid? The answer is no they’re not. We’ve actually had a number of studies — depending on exactly how you cut the numbers you can move it a few percent either way — but basically public employees are paid about what you’d expect given their education levels. So it’s not the case we have vastly overpaid public employees.

MICHAEL KRASNY: What about the pensions problem?

PAUL KRUGMAN: That’s a real issue, but it’s one of those exaggerated issues. You look at it, yeah there’s a problem. Public pensions are underfunded, but so are private pensions. So is a lot of stuff in this economy. That’s one of those issues that needs to be dealt with, but it’s not relevant to the immediate mess we’re in.

And here’s Krugman on the overall issue of whether stimulus or spending cuts is the correct course to right the economy:

PAUL KRUGMAN: There’s absolutely no reason to believe that spending more would not create a lot more employment right now. What we’ve seen is the experience with spending cuts. We’ve basically carried out a massive unethical human experiment in Europe and to some extent in the United States on the effects of spending cuts. And guess what: they destroy jobs, which says that reversing those spending cuts would bring those jobs back.

MICHAEL KRASNY: Then we have the GOP saying if you impose any kind of tax you hurt job creation….

PAUL KRUGMAN: That’s why the economy tanked after Clinton raised taxes, and why we had such a wonderful decade after George W. Bush cut taxes. And for that matter why America was such a disaster area back in the days of that socialist Dwight Eisenhower, when the top marginal tax rate was actually 91 percent.

Nothing in history supports that, there’s not a shred of evidence for that position… It comes back to that great Californian from long ago, Upton Sinclair, who said it’s very difficult to get a man to understand something when his salary depends on him not understanding it. So there’s a lot of money behind promoting that belief.

You can listen to the whole show here….

  • http://twitter.com/SoquelCreek Soquel by the Creek

    Krugman once again demonstrates that he is as deserved of the Nobel Prize in Economics as Barack Obama is for the Nobel Peace Prize.

    By Krugman’s logic using the Clinton Administration as an example, California should be the most prosperous state in the nation and Governor Brown’s tax hike should make us even more so!

    CHART:  California Income Tax Brackets and Governor Brown’s Tax Hike Proposal Compared to the HIGHEST Marginal Tax Rate in the Other 49 Stateshttp://www.twitpic.com/9g2pka/fullCHART:  California State Sales Tax Rates and Governor Brown’s Tax Hike Proposal Compared to the State Sales Tax Rate in the Other 49 Stateshttp://www.twitpic.com/9gfz3z/full

    Why did the economy grow during the Clinton Administration despite tax hikes?  There are a variety of reasons.

    * The “Peace Dividend” from the end of the Cold War
    * Fiscal restraints by the Clinton Administration and the Republic Congress (Remember Pay-Go?)
    * Historically low oil prices (when adjusting for inflation) 
    * Productivity increases due to telecom deregulation, the PC, and Internet
    * A bubble economy fueled by low interest rates from the Federal Reserve in response to the Asian Financial Crisis and Long-Term Capital Management.

  • http://twitter.com/SoquelCreek Soquel by the Creek

    Paul Krugman said: “What we’ve seen is the experience with spending cuts.”

    Really?  What spending cuts?  Looking at actual spending numbers by European governments, there have NOT been draconian spending cuts.  However, there has been a refusal to admit fiscal reality.  Many European government have unsustainable governmental and social safety net expenses.  Don’t forget to add in growing cost of military spending as the U.S. decreases its military spending. 
    http://marginalrevolution.com/wp-content/uploads/2012/05/austerity.jpg

    http://www.oecd-ilibrary.org/economics/government-final-consumption-expenditure-in-us-dollars-2012-3_govxp-table-2012-3-en

Author

Jon Brooks

Jon Brooks writes mostly on film for KQED Arts. He is also an online editor and writer for KQED's daily news blog, News Fix. Jon is a playwright whose work has been produced in San Francisco, New York, Italy, and around the U.S.

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